The old steadfast rules of personal credit health apply in large part to business credit health as well, in a variety of ways, which is why it is so important to get your personal credit in check, and then adopt the same philosophies in regards to your business credit as with your personal credit. It is vital to separate personal and business accounts (bank, credit, etc.), however, entrepreneurs must also understand that good personal credit health is essential to establishing a business line of credit in the first place, and ultimately to maintaining good business credit.
Personal credit worthiness and health can improve when an individual does the following:
- Make loan payments on or before the payment due date. Some lenders do have grace periods and the key for most is not paying past 30 days from the original payment due date.
- Keep a low balance/high credit ratio on debt, ESPECIALLY on revolving debt. When the balance of an account at or near the credit limit for that account, your creditor starts getting nervous about the risk – and the more anxiety they have, the more it takes a toll on your credit score.
- Check your credit report! Reviewing your credit report is critical to ensure that you are aware of all the accounts that are being reported in your name.
- Don’t let errors fester. Correct them as soon as possible, as there could be duplicate accounts reporting or plain errors in the account information on a debt.
Personal credit scores are derived from an algorithm of data that is weighted and measured. Business credit scores, on the other hand, are much more multifaceted, and vary according to type. Some scores look at bankruptcy risks, while others consider scores for potential supplies as well as risk scores for delinquency. For instance, a lender could see public records on a business credit report and decide that because of this the risk isn’t worth taking. Suppliers could view your invoice payment index as being outside of their tolerance level, and decide against going forward with a contract.
Some of the key factors that a business credit report could reflect (and which play into business credit scores) are:
- Timely payment of invoices from vendors/suppliers. A report with this information may track how you pay invoices or analyze your payment index as (30, 60, 90, 120 days) from the invoice due date.
- Credit utilization, referring to what debt you currently have v. the percentage of your unused credit, much like with personal credit reporting.
- Company liens and/or municipally filed legal records are sometimes used in business credit reports.
- Industry types are weighted in some reports to show any volatility that may exist in each industry type. This volatility analysis is formulated from historical data on known industry types.
- Landlord information can be used as another marker for a score or reporting reference.
It is paramount now more than ever that business owners have a good handle on their personal and business credit reports. Long gone are the days of handshake promises. Decisions are based on hard facts and justifiable numbers. Early stage business owners should make efforts to secure business credit by way of credit cards or small installment loans. The latter can be another easy way to begin the process of establishing business credit. Overall, credit will continue to be very important in our lives personally and professionally. Lenders want and need the ability to measure the credit worthiness of an individual or business, which in turn affects the flexibility we have in our day to day lives, and in the condition and growth of small businesses.